Investing in Property Is RISKIER Than You Think

In the 1987 crash, NZ share prices fell 57% ... and took nine years to recover. So everyone piled into property, because bricks and mortar felt safe. But was property ever actually safer? Or could you just not see the risk? In this episode, Ed and Andrew unpack the three hidden risks of property investing. You’ll learn: Why you couldn’t “see” property risk before homes.co.nz http://homes.co.nz and banking appsThe 3 risks everyone ignoresHow to stop them wiping out your wealthThe takeaway? Property isn’t risk-free ... it never was. The job is understanding exactly what you’re taking on. Let us know your thoughts by leaving us a voice message on the Property Academy Hotline⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.speakpipe.com/PropertyAcademy For more from Opes Partners: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.opespartners.co.nz/newsletter-sign-up⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Stay ahead of the NZ property market⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.opespartners.co.nz/private-property-sign-up?utm_source=podcast&utm_medium=promo&utm_campaign=pp_signup ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.instagram.com/opes_partners/ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TikTok⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.tiktok.com/@opespartners

• 0:00Speaker 00

  Hello and welcome along to the Property Academy Podcast by Obus Partners. I'm your host, Stephen Knight.

• 0:04Speaker 01

  And I'm Andrew Nicoll.

• 0:05Speaker 00

  And this is the show that helps Kiwis go from zero to five investment properties. So you could be financially free and stick around for the next 15 minutes because you're going to learn why investing in property is riskier than you think, the three risks that everyone ignores and how to stop them wiping out your wealth. Because during the 1987 stock market crash, did you know that New Zealand share prices actually dropped by 57%? It was a bigger drop than the US, the UK or Japan, right?

• 0:36Speaker 01

  That's pretty brutal.

• 0:38Speaker 00

  It was one of the largest share market downturns in the entire century and it having here in little old New Zealand. Now, Wall Street also had like a major share market crash at the same time, but they recovered in just two years. It took New Zealand nine years to fully recover, right? And so that's part of the reason why New Zealand started this love affair with property investing.

• 1:04Speaker 01

  Yeah, because if you think about the mentality of seeing the stock market crash, all of a sudden, people suddenly think, wow, we've got to invest in something solid, some bricks and mortar. But there are risks that people don't tend to think about when they think about investing in property.

• 1:19Speaker 00

  So what's number three?

• 1:21Speaker 01

  So when you think about that old saying that, you know, you have to invest in bricks and mortar, which, which-

• 1:26Speaker 00

  Safe as houses.

• 1:27Speaker 01

  I've just heard it forever. But that's because people feel like it's safe, but you can't really see the price changing back then, right? So take yourself back to 1987. Although you can't see on your Sharesies app, your shares going up and down, you could ring up your stockbroker or it's going to be in the paper and you'd be able to see the price changing all the time. But what you don't have is you don't have homes.co.nz. You can't log in and type in your ANZ app and then see your house value going up or down all the time like you can today. There weren't banking apps. And so the price of property was still going up and down, but it wasn't as visible. It wasn't like the newspapers publishing your value of your house going up and down, even though your stocks, you could see that every day.

• 2:13Speaker 01

  And so all of a sudden, that risk that was there and that volatility that existed wasn't as visible as it is today.

• 2:21Speaker 00

  And I think that's where people probably had the perception that property was very, very stable, where in actual fact, the price was going up and down. But because you, you couldn't like, or you wouldn't know what the price was until you called up a real estate agent, you didn't really know. And so I think one risk in property is that you look at the data you have available to you now, today, and you get spooked and start to sell early. And I know everybody says you've got to buy low and sell high, but the emotions mean that you often do the opposite, right? Because then you feel really confident when everyone else is rushing in, so you rush in too, and so you buy at the top. And then when everybody's retreating, you think this is a terrible time, I don't want

• 3:06Speaker 00

  to own this asset. So you sell it at a low as opposed to the high. So how do you stop that from wiping out your wealth?

• 3:15Speaker 01

  So, I mean, I've had clients that do something as extreme as deleting their banking app off their phone. Like that way, they're not faced with every time they log into the banking app, seeing that their house price is jumping around all the time. Now, that's not to say you should ignore risks, right? You shouldn't be completely blind to the fact that the housing market's going through a pretty hard time at the moment, but you maybe just don't want to be reminded of it so often. In fact, one of my clients yesterday, who, he'll be listening to this as well, you know who you are, he bought two properties, one in Auckland, one in Christchurch. Auckland one's gone down, Christchurch one's gone up. And now he's thinking about selling the Auckland one and keeping the Christchurch one because,

• 3:59Speaker 01

  oh, well, that's the good asset and the other one's bad. But actually, it's just because he can see it jumping around all the time in Auckland. If you're going to sell something, sell the Christchurch one and then, and then crystallise the loss, the gains, not the losses, and then don't think about the Auckland one for a while.

• 4:12Speaker 00

  Well, and part of that is risk number two, which is if we think about the S and P 500, you can see it going up, you can see it going down, but it's relatively stable, right? But versus if we were to look at a single share that's part of the index, let's say Alphabet, which owns Google, that single share is going to jump up, down and around so much more than the S and P 500. And the reason behind that is the S and P is the average, a weighted average, but it's an average of 500 companies and Alphabet's just one of them, right?

• 4:50Speaker 01

  So it might go down, but then something else might be going up. And so all of a sudden, it looks like everything's smooth and going up all the time on a more steady basis.

• 4:59Speaker 00

  As much as it can be, right? Now, if I was to just show you a graph of New Zealand house prices, you would have exactly the same reaction, right? You see them going up and down a little bit, but pretty much it's all smooth, right? And it makes it look like most of the time, house prices are going up in New Zealand. But I always say to people, you're not buying the average house. You're buying a house in Auckland or you're buying a house in Napier or you're buying a house in Gisborne. Now, even if we were to look at a smaller market like Marlborough, which still has about 24,000 houses, right? You would then see that Marlborough is going up, down, sideways, like way more, way more

• 5:43Speaker 00

  ups and downs compared to like New Zealand as a whole. And that's because Marlborough could be going flat or down while Gisborne's booming and vice versa. You know, one part of the country could be crashing while another one's going off like a frog in a sock. And so that averages out and makes it look like house prices are pretty much going up all of the time. If we just look at the New Zealand house price index, but even if we look at a single region, you start to see how volatile it is. Now, remember, this is an average in Marlborough of 24,000 houses. So your house will be way more up and down than you even see on a graph. And so I often try and say to investors, you've just got to keep in mind that even

• 6:25Speaker 00

  if we look at what's happening in Christchurch, that's an average of four, not 400,000 houses, you've got 400,000 people, so it'd be about 160,000 houses. Like your single house is going to be way more up and down when you go and look at homes.co.nz. And again, the risk is how it impacts your mental state of mind. So I always say to people, how are we going to, how are we going to protect you from this wiping out your wealth? And I think it is don't just buy in a single city. So I did a piece of analysis, this is a few years ago now, and what I looked at is because you can't just buy the average house in New Zealand, you've got to pick a city. What would have happened, and I did this by random, what happened if you bought one property in Auckland and one property in Gisborne?

• 7:10Speaker 00

  And I just did it because Gisborne's kind of a nice, small region that's going to be nice and volatile. What would have happened? Well, blow me down, if you bought the same priced property in Gisborne as you did in Auckland, sometimes when the Gisborne house prices are flat, Auckland's taking off. And then when Auckland starts to flat it out, Gisborne's taking off. And sometimes they both go up and down, down roughly together. But if you'd done that, your quote unquote diversified portfolio of two properties, which is not in fact diversified, but more diversified than if you bought in one city, it much more closely approximates what was happening as the New Zealand average and starts to take out some of that volatility.

• 7:54Speaker 00

  Now, that's not a perfect example, right? But it's just a really simple way to get across that if we can invest in two different cities, rather than having all of our eggs in one basket, that can start to smooth out some of the, the ups and downs. A bit like your example before, if your investor had purchased in Auckland and Christchurch, sure, they might be down on their Auckland property, but they're up on their Christchurch property. So that starts to smooth out some of those ups and downs because it could have just as easily been the other way where Auckland's up and Christchurch is down. But what is the number one risk that property investors ignore?

• 8:28Speaker 01

  Now, this is one that I think you, you did the industry a solid coming up with the name for this, the mortgage magnifier. Now, this is leverage, right? So the number one benefit of property, most of the time is actually that you can use the bank's money to invest in it rather than just use your own. Now, that is a double edged sword because you put in your 20%, you borrow the other 80% or you put in 10% and you borrow the other 90%. What that means is any uplift or downturn in the value is magnified by the amount of debt you've got. So I'll give you an example. Let's say you put in a 10% deposit into a $700,000 property. If there's a market shift of 20%,

• 9:10Speaker 01

  well, that means that the gain or loss you suffer of $140,000, 20% of a $700,000 asset, well, against your deposit of $70,000 means that you've basically 10x'd the amount of return on your money.

• 9:26Speaker 00

  And that's because you put in a $70,000 deposit, right? But if your 700 grand property goes up by 20%, it's gone up in value by 140 grand. That is a 200% gain on your deposit, right? Because you put in 70 grand, you made 140. So the market changed by 20%. But because you put in a 10th of the money, you get 10 times the impact on the market. So if the market moved by 20%, you got a 200% return on your deposit. But it can also go the other way. What happens if the value of your property falls by 20%?

• 10:05Speaker 01

  Well, now you've wiped out your entire deposit and then some. And that's where, that's where it gets pretty scary for people when they go into negative equity. So, um, you know, now we're negative 200% on our, on our deposit. I think that's where people at the moment who have invested at the peak of the market, my investor I was saying before, if they're reminded every day of what their, um, current position is, it makes them worry that they're never going to get back to where they started.

• 10:32Speaker 00

  And in this situation, if you started out with 70 grand worth of equity in the property with a 10% deposit and the property loses 140 grand, as, you know, in Wellington, property price is down about 30 odd percent. You've now got negative equity of 70 grand, right? You're 70 grand underwater, the mortgage is $70,000 higher than what the value of that property is. And so not only have you lost your deposit, you've lost it again. Now, how do we stop that from wiping out your wealth?

• 11:01Speaker 01

  Well, this is where it's about holding on for the long term. So, um, for any investor that's been working with us and, and, and had exactly this happen, where they're, they're, they're feeling backwards at the moment. One of the things I think most people need to remember is that over time, property values tend to go up and it does tend to smooth out. So if you look at the most, um, the best ever year, the best ever year of capital growth in New Zealand. If you're just really lucky and your property followed the market perfectly to the average, you buy a property one year, a year later it's up 30, over 30%. Like you think you're a genius and then you tell your friend Tom, Tom, you're not going to believe this. This is, this is so easy. You go buy a property, Tom goes and does that.

• 11:44Speaker 01

  Actually, it was pretty much the, the next year, negative 14%. Tom thinks you're an idiot, can't believe you told me to buy a property.

• 11:52Speaker 00

  So the, the negative 14%, that's the worst ever year in New Zealand property.

• 11:57Speaker 01

  Yeah. And so, so if you kind of stretch this out to say five years, so the best ever five years, um, you're 14.7%, awesome. Your worst ever five years is negative 0.4% annual growth rate. So you're thinking, okay, well, that's, that's bad, but it's nowhere near as bad. It's not like that 14% is every single year, year on year. Once you get to 10 years, it becomes really interesting. So now the, now the gap between the best and the worst is narrowed. So your best ever 10 year stretch is 10.5, awesome. Worst ever is 4.6. So, okay, that's positive though. So that's not the end of the world. And once you kind of go to 20 years again, there isn't as much in it. Your, your best ever is 8.8 and your worst ever is 5.2.

• 12:42Speaker 01

  So your advantage of getting it really perfectly with timing, that kind of dissipates over time. But so does the worst timing.

• 12:50Speaker 00

  And now bear in mind, a, a small difference between 8.8% per year and 5.2% per year, that starts to add up over time from compounding growth, right? So timing has an impact. But what we often try and remind investors is that whenever you invest, there's going to be some good years, there's going to be some bad years. And over time, that's going to start to even it out. The longer you're in the market, the more likely it is that you're going to have some balance of those, those two types of years, the good years and the really bad years. If you're in there for only a single year, you might get it really good, you might get it really bad. Uh, and when we add in the mortgage back to fire effect, that's why it's important to stay in the market. It actually reminds me, I was just speaking to a journalist from Stuff, Jill.

• 13:32Speaker 00

  And she called me up on a Friday and she was telling me about some investors who had bought in the Wellington region at the market's peak. They'd then moved to Auckland and they're thinking about selling. Now they bought this property for $1.08 million.

• 13:47Speaker 01

  In Wellington.

• 13:47Speaker 00

  In Wellington. The current value is $850,000. So they're about 21% down. And now this was their own home, it's not an investment property. But what they're thinking about is should we sell this property and effectively start again? And what I was saying to them is Jill, you've just got to remember, if they put in a 20% deposit, so they put in 216 grand, and I don't know exactly how much they put in. They might've paid off some of the mortgage. They have lost about $230,000 on this property. So if they sell today excluding, excluding, um, like any mortgage payments, right? Once they pay the real estate agent and the transaction costs, they could be underwater by about $56,000.

• 14:31Speaker 01

  So they can't really afford to start again.

• 14:33Speaker 00

  But even if they did sell it, like where does that put them? It puts them in the, in the position where they had a house and now they don't have a house, right? And I understand that the house might not have much equity. In fact, it might even be a negative equity. But if they sell the house now, they couldn't buy it back. And so that's not to say that these guys should absolutely hold on, right? Because they're needing to top up this mortgage because it's a big mortgage, the rent's not covering all of the costs. So they would need to consider, you know, what else could we do with that? I think it was about $300 a week, you know, you might put that somewhere else. But you've got to remember that if you're buying high and selling low, that's going to have the impact, at least in this situation, of potentially wiping out all of their, all of their, uh, their wealth.

• 15:17Speaker 00

  And on top of that, they've got a house now, if they sell it, they no longer have a house.

• 15:21Speaker 01

  Yeah, it's a, it's a really hard one because I know a lot of people, um, are in this situation and are kind of second guessing whether it's an owner occupied or an investment decision. And do we just suture the wound and do we just move on? But, um, what, once you kind of think, okay, well, that, that loss has already occurred, um, you can either stay the course now and see if you can recover, or you can guarantee that that loss is true.

• 15:46Speaker 00

  Well, shall I show you a graph that I made yesterday?

• 15:49Speaker 01

  Oh, yeah.

• 15:49Speaker 00

  That, um, nobody's seen yet.

• 15:52Speaker 01

  Ooh, a new graph.

• 15:53Speaker 00

  But it's a banger, it's an absolute banger. I made this as I was running out the door, um, yesterday to go home and have dinner with my lovely family. I won't say lovely family, it's just Angela.

• 16:07Speaker 00

  I mean, it's not just Angela, right? Anyway, I was looking at how long does it take or could it take for house prices to recover? And one thing that stuck out to me is if we look at Southland, Otago and Canterbury, all three of those regions in the South Island have already fully recovered back to the peak of the market, right? Canterbury's just got there, Otago and Southland have, have like more than fully recovered and are booming again. Now, if we look at the top of the South Island, all of those four regions, Nelson, Marlborough, Tasman and West Coast, they're lumped in together when, when the Real Estate Institute does their numbers. Hmm. There's about a 50% chance, because they're only about 8.7% below their peak.

• 16:49Speaker 00

  There's about a 50% chance that those regions recover within two years.

• 16:53Speaker 01

  So a flip of a coin.

• 16:54Speaker 00

  So within two years, you could easily have the entire South Island fully recovered in terms of house prices. Not every, not every like individual town perhaps, but overall, if we look at it on a regional basis. So the South Island's doing pretty good. It's mainly the North that's quite messed up at the moment. Now, if we look at the Waikato region, they're about 15% below their peaks. Bay of Plenty, they are about 15% as well. It's about a 50% chance that those guys recover within three years and get back to those peak prices as well. Now, if you looked at a pessimistic scenario, there's about a three in four chance that they recover within six years, right? The reason I wanted to show you these numbers is it gives you a sense of, okay, there are definitely parts

• 17:39Speaker 00

  of the country where they're hurting, right? Wellington's only got a 50/50 chance that it recovers within seven years because it's been so battered and bruised, right? House prices there 30% below where they were at the peak of the market. But there is some recoveries going on where you go, actually, like three out of, I think, 15, 16 regions in New Zealand. In fact, 12, once you take into account that Gisborne and, and Hawke's Bay are treated as the same region. And so are Nelson, Marlborough, Tasman and West Coast. You know, three out of about 12 regions have fully recovered. Sure, they might be lower population like Southland and some other areas like Wellington and Auckland. But it's just nice to put it into perspective to say, there are areas that are hurting, there are areas that are booming.

• 18:22Speaker 00

  That's the, like, if you're looking for evidence that a recovery can happen, there is evidence that it can happen. If you want to see evidence that, um, house prices are still falling, you can see that as well in Wellington.

• 18:32Speaker 01

  It's interesting because just last week I was talking to some people who had invested in Auckland, um, where the marketer came down and I, and I was talking about the recovery of, you know, the South Island. And they said, oh, we, we didn't even know that. We, we haven't even been, you know, reading about that. We've only been reading about the terrible markets. Um, or maybe that's the fact that it doesn't get reported on as much and it's interesting. Or maybe it's just that they've got confirmation bias and they're looking at the market that suits them and makes them feel a bit depressed right now.

• 19:01Speaker 00

  And over the last 15 minutes, you've learned why investing in property is riskier than you think. The three risks that everyone ignores and how to stop them wiping out your wealth. Right, let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast. Really does help us get the message out to more people.

• 19:21Speaker 00

  Thanks for listening to the Property Academy Podcast. I'm your host, Stephen Knight.

• 19:24Speaker 01

  And I'm Andrew Lecan.

• 19:25Speaker 00

  We're going to be back here tomorrow with even more daily strategies, texts and insights to help you get the most out of the New Zealand property market. Until next time.